September 29, 2011
Council of Institutional Investors Analyzes Say-on-Pay Proposals
by Robert Kropp

A report from the CII finds that pay for performance issues were cited most often by institutional
investors as the reason for voting against management proposals.

2011 was the first year in which the Securities and Exchange Commission (SEC) required that public
companies hold shareowner votes on executive compensation. For sustainable investors and corporate
governance advocates, the results were disappointing, as more than 90% of management proposals on
the issue passed by an overwhelming majority.

As the shareowner activist Robert AG
Monks stated in a recent speech, "The ugly reality (is) that many institutional
shareholders—conspicuously those considered educational and philanthropic leaders—simply choose not
to function as stewards of the equity shares in their portfolios."

Those institutional
investors that do make the effort to vote their shares, along with investment management firms,
proxy advisers and solicitors, and company officials, were surveyed in a recently published report that analyzes proposals rejected by a majority of
shareowners at 37 companies in votes between January and July 2011.

The report,
commissioned by the Council of Institutional
Investors (CII) and authored by Farient Advisors, found that one-quarter of the management
proposals rejected by shareowners occurred at companies in the real estate, homebuilding, or
construction-related sectors; "industries," the report states, "that were hit hard in the economic
downturn and mostly are still hurting." Prominent companies whose proposals were rejected include
Constellation Energy, Freeport McMoRan, and Hewlett-Packard.

The authors asked
investors—public pension plans, mutual funds, and union pension funds, with collective assets under
management in excess of $7.9 trillion—how they decided on their votes at the 37 companies where
management proposals were rejected.

According to the report, the factors most often cited
by the investors were a disconnect between pay and performance (92%); poor pay practices (57%);
poor disclosure (35%); and inappropriately high level of compensation (16%).

The investors
also said that they focused on CEO pay, and viewed their vote as an opportunity to voice their
concerns rather that deliver a referendum on the oversight of Boards of Directors.

"Boards
at companies where say-on-pay proposals garnered significant opposition should be reaching out to
their investors to discuss their concerns," Ann Yerger, executive director of the CII, said. "They
should also review their pay practices and consider appropriate changes." The Council identifies
itself as "a leading advocate for say-on-pay," according to the report.